How should I report PayPal fees on my taxes - do I deduct them from my income?

You should report the FULL amount ($100 in your example) as your gross income on your Schedule C. But don't worry - you won't be taxed on money you didn't receive! You can then deduct the PayPal fees ($3.20 in your example) as a business expense on the same form. This approach gives you the most accurate picture of your business finances for tax purposes. The IRS wants to see your total revenue and then all of your legitimate business expenses separately rather than just the net amount. Look for "Commissions and fees" or "Payment processing fees" as line items on Schedule C where you can list all your PayPal fees as a business expense. Just make sure you keep good records of all those fees throughout the year!

Just wanted to share my experience with this exact same issue! I was so confused about PayPal fees for my woodworking business until I started using taxr.ai (https://taxr.ai) to analyze my business transactions. It automatically categorized all my PayPal payments and separated the fees as deductible business expenses. I uploaded my PayPal annual statement and it sorted everything out instantly - showing me exactly how to report both the full income amount and the fees separately. Saved me hours of headaches trying to figure out which part goes where on my Schedule C.

Just wanted to follow up - I tried taxr.ai after seeing this thread and wow! It sorted through my complete mess of payment processing fees from PayPal, Stripe AND Square in minutes. The interface showed me exactly how much I'd paid in fees across all platforms (which was way more than I realized) and categorized everything perfectly for Schedule C. I've been doing this manually for years and always stressed about whether I was doing it right. Definitely using this for my 2025 filing!

Another thing that helped me with this PayPal fee confusion was finally getting through to the IRS to ask them directly. After days of trying to call and getting nowhere, I used Claimyr (https://claimyr.com) and actually got through to a real IRS agent in about 20 minutes! They have this demo video that shows how it works: https://youtu.be/_kiP6q8DX5c The agent confirmed what others are saying here - report the full payment as income and deduct the fees as a business expense. The agent even specified which expense category on Schedule C to use for different payment processing fees. Such a relief to hear it directly from the IRS instead of guessing.

I need to eat my words. After posting that skeptical comment, I was still desperate to talk to someone at the IRS about some PayPal issues similar to this thread, so I tried Claimyr anyway. Got connected to an IRS rep in about 30 minutes which is INSANE considering I spent 2+ hours on hold last week and eventually gave up. The agent confirmed exactly what to do with PayPal fees (report full amount as income, deduct fees as expenses under "commissions and fees" on Schedule C). Honestly shocked this service actually delivered.

Here's my two cents as someone who's been dealing with this for years - it's actually easier to track if you just record the gross amount as income. Run a yearly report from PayPal that shows both the gross payments and the fees. Then you can easily see your total business income and your total deductible fees in one place. Also don't forget that PayPal fees aren't your only deductible business expenses! Materials, shipping, home office, etc. all count too. I messed this up my first couple years and paid way more taxes than I needed to.

Has anyone used TurboTax for reporting PayPal business income? Does it have a specific section for payment processing fees or do you just add it as a general business expense?

Just wanted to add another perspective on this - I'm a CPA and see this PayPal fee question constantly with small business clients. The advice here is spot-on: report the full $100 as income and deduct the $3.20 as a business expense on Schedule C. One tip that might help with your bookkeeping - consider setting up a separate business checking account if you haven't already. When PayPal deposits the net amount ($96.80), make a journal entry showing the full sale ($100) as income and the fee ($3.20) as an expense. This creates a clear paper trail for tax time. Also, if your sales increased significantly this year, you might want to consider quarterly estimated tax payments next year to avoid underpayment penalties. The IRS gets grumpy when self-employment income jumps and you're not making quarterly payments. Worth discussing with a tax pro if your net profit is over $10K or so.

This is such a helpful thread! I've been struggling with the exact same issue for my online craft business. After reading through everyone's experiences, I feel much more confident about reporting the full transaction amount as income and deducting PayPal fees separately. One thing I wanted to add - for anyone else who's been doing this wrong in previous years like I probably have been, it's reassuring to know that the IRS is more concerned about getting the right tax amount than perfect accounting methods. I've been only reporting the net amounts that hit my bank account, but now I understand why the gross method with separate deductions is better for tracking business performance. The tip about PayPal's Financial Summary report is gold - I had no idea that existed and have been manually calculating everything like a caveman! Going to generate that report right now for this tax year. Thanks everyone for sharing your real-world experiences with this confusing issue.

Great thread everyone! As someone who also runs a small online business, I can relate to this confusion. One thing I learned from my accountant is to also keep track of any PayPal currency conversion fees if you sell internationally - those are deductible business expenses too. Also, don't forget that if you use PayPal's "Goods and Services" option for buyer protection, those fees are higher than "Friends and Family" but they're legitimate business expenses. I see some sellers trying to avoid those fees by asking customers to use F&F, but that removes buyer protection and can actually hurt your business reputation. For anyone still manually tracking this stuff, I'd strongly recommend setting up a simple spreadsheet or using accounting software. Even something basic like QuickBooks Self-Employed can connect to PayPal and automatically categorize transactions. It's been a game-changer for keeping my records organized and making tax time less stressful.

This thread has been incredibly helpful! I'm in a similar situation with my small jewelry business and have been stressing about PayPal fees for months. Reading through everyone's experiences has given me so much clarity. One thing I wanted to add that might help other newcomers like me - I was initially worried about "double taxation" by reporting the full $100 when I only received $96.80. But now I understand that by deducting the $3.20 fee as a business expense, the math works out exactly the same. The IRS just wants to see the complete picture of your business operations rather than pre-netted amounts. For anyone still confused like I was, think of it this way: PayPal is essentially a business service provider (like a credit card processor), and their fees are just another cost of doing business - similar to shipping supplies, packaging materials, or advertising costs. You wouldn't subtract those costs from your reported income either; you'd report the full sale amount and then deduct those expenses separately. Thanks to everyone who shared their real experiences and especially to the CPA who confirmed this is the right approach. This community is amazing for helping small business owners navigate these confusing tax situations!

This has been such an educational thread! As someone who just started selling handmade soaps online and uses PayPal exclusively, I was completely lost on how to handle the fees. I've been tracking everything in a basic notebook (yes, old school!) and only writing down what actually deposited into my account. Reading through everyone's experiences here, especially the CPA's advice, has made it crystal clear that I need to report the full transaction amounts and deduct the PayPal fees separately on Schedule C. The analogy someone made about PayPal being just another business service provider like shipping or packaging really helped it click for me. I'm definitely going to check out that PayPal Financial Summary report that Andre mentioned - I had no idea PayPal could generate yearly summaries automatically. That would save me so much time compared to my current method of going through transaction by transaction in my little notebook! One question for the group: if I've only been in business for about 4 months this year, is it worth setting up accounting software now or should I just get through this first year manually and then upgrade my system for next year? My sales volume is still pretty small but growing steadily. Thanks to everyone for sharing their real-world experiences - this community is invaluable for us small business newbies trying to figure out taxes without breaking the bank on professional help!

This thread has been a goldmine of information! I'm also dealing with PayPal fees for my small online business and was making the same mistake of only reporting the net amounts. The clarity everyone has provided about reporting gross income and deducting fees separately on Schedule C is exactly what I needed. What really helped me understand this was the comparison to other business expenses - you wouldn't subtract your shipping costs or material costs from your reported income, you'd deduct them separately. PayPal fees are just another cost of doing business that gets the same treatment. I'm curious about one thing though - for those of you using accounting software that connects to PayPal, does it automatically separate the fees from the gross transaction amounts? Or do you still need to manually categorize the fees as business expenses? I'm trying to decide between QuickBooks and some of the other options mentioned here, and automation level would definitely influence my choice. Also wanted to thank the CPA who chimed in - having professional confirmation that this is the correct approach gives me so much peace of mind. Sometimes when you're a small business owner trying to figure everything out on your own, it's hard to know if you're doing things right!

This discussion has been incredibly helpful! I'm a freelance graphic designer who uses PayPal for client payments, and I've been making the same mistake many of you described - only reporting the net amounts that hit my account after PayPal's cut. The explanation about treating PayPal fees like any other business expense really made it click for me. I wouldn't deduct my Adobe Creative Suite subscription or office supplies from my reported income - I'd report the full client payment and then deduct those expenses separately on Schedule C. PayPal fees should work the same way. I'm particularly grateful for the tip about PayPal's Financial Summary report. I've been manually tracking everything in a spreadsheet and dreading tax season because of how tedious it was going to be. Having PayPal generate a yearly breakdown of gross payments vs. fees automatically is going to save me hours of work. One thing I wanted to add for other service-based freelancers - don't forget that PayPal also charges fees for international transactions and currency conversions if you have clients overseas. Those are deductible business expenses too! I have several Canadian clients and those conversion fees definitely add up over the year. Thanks to everyone who shared their experiences, especially the CPA who confirmed this is the right approach. It's reassuring to know I can fix my method going forward without getting in trouble for previous years where I did it the "wrong" way.

This thread has been so enlightening! I'm relatively new to running an online business (started my handmade candle shop about 6 months ago) and PayPal fees have been one of those things keeping me up at night wondering if I'm handling them correctly. Reading through everyone's experiences, I now understand that I should be reporting the full transaction amount as income and then deducting the PayPal fees as a separate business expense on Schedule C. The analogy comparing PayPal fees to other business expenses like shipping or materials really helped it click - you wouldn't subtract those costs from your gross sales, so PayPal fees should be treated the same way. I've been using a basic spreadsheet to track everything, but after seeing the recommendations for PayPal's Financial Summary report and various accounting software options, I think it's time to upgrade my system. The idea of PayPal automatically generating a breakdown of gross payments versus fees sounds like it would save me hours of manual calculations. One question for the group - when you're deducting PayPal fees on Schedule C, do you lump all payment processing fees together in one line item, or do you separate them by platform if you use multiple processors? I also use Venmo for some local sales and wasn't sure if they should all go together or be itemized separately. Thanks to everyone for sharing their real experiences and especially to the CPA who provided professional confirmation. This community has been invaluable for helping me navigate these tax questions as a small business owner!